Monday, November 21, 2016

Might BlackRock Become the Next Lehman Brothers?

America desperately needs better leadership and we in Texas should step up and provide that leadership.  We must understand banking and finance to safeguard America from more calamities like the Great Depression and the Great Recession.  One example of a company that deserves careful attention is BlackRock, Inc., a multinational investment management corporation based in New York City.  A recent article in the New York Times, This Man Oversees $5 Trillion by Landon Thomas, Jr. was published in the Sunday September 15, 2016 edition.

Here is what we need to notice.  The company was founded and is led by Laurence D. Fink, who  while at First Boston pioneered securitized mortgages along with Lewis Ranieri at Salomon Brothers, which led to the subprime melt-down and the Great Recession.  Now Mr. Fink has built up BlackRock and his firm has a software program called Aladdin (Asset Liability and Debt and Derivatives Investment Network).  This software is supported by 2,300 of BlackRock’s 13,000 employees.  Seventy-five firms — including Deutsche Bank and Freddie Mac — managing a total of $10 trillion, now use it.  BlackRock believes by feeding data to this program they can master risk.  Aladdin might be due for a fall.

Remember Knight Capital Group suffered a software problem that destroyed the company.  On August 1, 2012, Knight Capital deployed untested software to their production software systems, not a test system, but the real-deal.   The company quickly lost $400 million and was liquidated.  The Aladdin program is used to manage $5 trillion of BlackRock assets and another $10 trillion of assets in 75 companies that use the program.  Do you remember the Flash Crash on May 6, 2010?  Hundreds of billions of dollars were quickly lost on the stock market.  The market recovered.  The real losses were not divulged.  Imagine what a $15 trillion death dive would do to the world financial system.

Consider software design and reliability.  In November 1999 the Mars Climate Orbiter burned up because of a trivial software error, a failure to convert units from English to metric.  Then in December 25, 2003 the European Space Agency  ExoMars lander Schiaparelli crashed into Mars.  The heat shield and parachute ejected too early.  Another software error.  If rocket scientists cannot guarantee flawless software on something as simple as Mars satellites,  why would financial firms be more successful with more complex programs?

We in Texas need to master software design and software reliability so we can safe financial software, and so we can analyze and repair flawed financial software before it becomes too late.  Lehman Brothers was not as big as BlackRock when its demise dragged the world into the Great Recession.

John Connally and James Baker were Texans who were Secretary of the Treasury.  Surely someday another Texan will fill that roll and I hope that Texan understands the danger software poses to the world financial system.  But we  must do more than hope.  We must prepare our future leaders with education and experience to fill roles like Secretary of the Treasury.


This article is a thread within the The Texas Software Reliability Project.
This is also a thread within The Texas Banking and Finance Project